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2 FM RL 1.3.2

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19 views9 pages

2 FM RL 1.3.2

Uploaded by

aravind
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Financial Management

MBA ZG 521

BITS Pilani Krishnamurthy Bindumadhavan, CFA, FRM


Associate Professor, Management - Finance
Pilani Campus
Email: [email protected]
BITS Pilani
Pilani|Dubai|Goa|Hyderabad

Financial Statements Analysis


- Part 2
Common size analysis

• For common size income statement analysis, we divide each entry in the income
statement by the company’s sales

• For common size balance sheet analysis, we divide each entry in the balance sheet
by the firm’s total assets

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956


Common Size Income
Statement Analysis

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956


Common Size Income
Statement Analysis
Key take-away’s:

• Cost of goods sold make up 75% of the firm’s sales resulting in a gross
profit of 25%
• Selling expenses account for about 3% of sales. Income taxes account for
4.1% of the firm’s sales
• After accounting for all expenses, the firm generates net income of 7.6%
of the firm’s sales

Essentially this type of analysis helps answer questions such as:

• What percentage of revenues is the cost of goods sold?


• What is the gross profit percentage?
• What is the mix of expenses (in terms of percentages) that the company has
incurred in this period?
• What is the net profit percentage?

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956


Common Size Balance Sheet

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956


Common Size Balance Sheet
Analysis
Key take-away’s:
• Total current assets account for 32.6% of firm’s assets in 2010, showing an
increase of 5.6%
• Similarly total current liabilities account for 14.6% of firm’s total liabilities and
equity (which is equal to assets) in 2010, showing a decline of 2%
• Long-term debt account for 39.2% of firm’s assets in 2010, showing a decline
of 1.7%
Essentially this type of analysis helps answer questions such as:
• What percentage of total assets (or liabilities + equity) is classified as current
assets (or current liabilities)?
• What percentage of total assets is classified as inventory? Is this changing over
time? If it is increasing does this mean the firm is facing difficulty in selling its
inventory? If yes, is that because of competition or obsolescence?
• What percentage of total assets is classified as accounts receivable? If it is
increasing does this mean the firm is having difficulty in collections? If it is
decreasing, is it because of a tighter credit policy? Is this leading to lost sales?
• What is the composition of the capital structure?

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956


Horizontal Analysis
• In horizontal analysis, typically a base year is selected and the dollar amount of
each financial statement item in subsequent years is converted to a percentage of
the base year dollar amount

Essentially this type of analysis helps answer questions such as:

Fraud detection analysis: In this scenario we would select the last year in which we
believe there was no fraud as the base year so as to estimate the extent of the fraud
in subsequent years

Investment analysis (after introduction of new product/ management/ etc.): In


this scenario we would select the last year before the change as the base year so
that we may estimate the impact of the change, i.e. new product/ management/
etc.

Example in Excel!

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956


Thank You

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